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Financial Life Advisor
Entrepreneur in the Music Industry
I am a 29 yr old entrepreneur in the music industry. I started my own business about 5 years ago, closed it, partnered with a similar company with much better resources and I am now working for a base salary + commissions and hopefully a good stock option plan (it has not been established yet because there are not enough employees in our company just yet). I have also been working on launching a music festival company (I am the founder/managing partner). I have invested about $3K into it for legal fees and I have just started fund raising, I need $5M to launch. I rent an apartment and I have about $6K in a stock account that I actively manage. I have about $7K in credit card debt that I am actively paying down. Based on my situation what would be some good smaller investments to make now that would benefit me later in life? What do you advise about carrying the credit card debt and slowly paying it down versus taking money out of the stock market and paying that debt down faster. I have a small savings account that I want to use as a down payment on a home in about 3-5 years
A.G. from San Francisco, CA A, I congratulate you for your fearlessness. Any entrepreneur knows that a regular income is far from certain. While the rewards of being an entrepreneur can be very satisfying, the financial risks are numerous. Your primary goal should always be self-preservation. You are taking an increasing level of risk by being in business for yourself. You will need even more of a financial cushion than most to help get over the dry spells of your somewhat irregular income. In your specific circumstance, you will get a basic level of salary. This base income should help with the monthly budgeting process.
In the interest of self-preservation, you should always be looking for ways to lower your risk. One of the things which raise risk for investors is leverage. When money is borrowed to invest, the level of return has to exceed the cost of borrowing. The more risk you accept, the higher the likelihood you can get into a cash flow crisis as the higher risk investments can (and often do) drop in value. When you are holding credit card debt (at a relatively low rate for credit cards), let us say 12%-14%, and then turning around and investing it in securities which you hope to get a 10-12% (on the higher end of what to expect) then you are expecting to lose 2% a year. If you include the tax on your investment gains, it further reduces what the investments will bring. The investments will also not likely bring a steady return. To illustrate, you could see large swings in value, which net out to an annual 10-12% return, but you could gain or lose 20 or even 30% each year. If you miss a payment, you run the risk of dramatically increasing the interest rate on your credit card which also makes this investment deal worse for you. Therefore, I rarely recommend having an after-tax brokerage investment account when you have credit card balances which you are not completely paying off monthly.
A book that exams the personality traits which are common in extraordinarily financially successful people is called The Millionaire Mind, by Dr. Thomas J. Stanley. In the book, Dr. Stanley found that many of the people who had amassed a truly significant amount of wealth had done it through building their own businesses. Many were able to live frugally while reinvesting all of their early profits back into the business. Their reinvestment in the business allowed it to grow much more quickly.
I cite this example to underscore two things. The first is that if unsuccessful, these entrepreneurs may face losing everything that have financially. It is difficult for to advise a person to attempt a financial risk like this. If they fail, the results can be quite devastating, financially as well as emotionally. That is not to say it should not be attempted, but rather, that it is important to know the risks going in, and a practical observation is that if you are going to “put all your chips in” for a big potential payout, you should probably attempt it when you are young and do not have as many chips to lose.
The second thing to consider about this type of situation is that when you are involved with such an important single investment, you need to devote 100% of time, effort, and resources to making that venture very successful. It is in your best interest to protect your financial solvency at all times. If you are spending large amounts of time on things that pale in comparison to the scope of your main entrepreneurial endeavor, your chances of success are diminished.
As far as the small investments you can make to improve your situation, I would really try to make your dollars work hard for you. If you are spending money, especially when discussing large portions of your monthly cash flow, you should be trying to direct as much of it on appreciating assets and slowly depreciating items which you need for income generation (like a car, or equipment for your business). Since it will not bring a long term return, you should look to limit your consumption spending (food, entertainment, travel, etc) as it is consumed and/or depreciates very quickly. You are young; long term is your friend. Let it work for you.
A house would be a very good example of a long-term appreciating asset. If you buy a home, it is a pretty safe bet to assume that over time, the value of that asset will increase. When you look at a home purchase it can represent all three types of spending. You are purchasing an appreciating asset (the land), depreciating use asset (the structure) and consumption (utilities, tax, repair, etc). By owning a home, you are controlling the long term cost of your annual living expense and being rewarded with annual value appreciation and possibly some tax benefits. If you own too much house though, the consumption portion can outweigh the value of appreciating portion.
In your situation, you will need to weigh the value of having a strong balance sheet vs. financing to grow the business. I would probably not look to buy a house until I had a 20% down payment and cash in the bank that could cover 6 months of expenses. Try not to buy the most house you are approved for. The less house you have, the more is left for your business pursuits.
Look, the bottom line is this: If you can build your business into what you imagine it can be, then you will have plenty of money to hire people like me to manage it and advise you. The best thing to do right now is follow your passion with 100% of your time and money. You will know if it is really working or not. If you have any more questions in the future, let me know. Hope this helps you make decisions on how to view your finances as an entrepreneur.
Posted by Ben Gurwitz on 23rd November, 2009 | Comments | Trackbacks
Tags: Financial Planning, Debt Management, Nov 09
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